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UK Slipping Into Deflation

Britain has slipped into deflation, official figures could show this week, with lower air fares, cheaper water bills and an ongoing supermarket price war expected to have pushed the country into its first period of falling prices on record.

The Bank of England believes that prices, as measured by the consumer prices index (CPI) fell by 0.1pc in April compared with a year ago. This would be the first time the UK has entered deflation since comparable records began in 1989. Experimental data from the Office for National Statistics suggest it is also the lowest rate since 1960.

Inflation has remained at zero since February, and economists are divided over whether the figure will fall further in April.

Alan Clarke, a strategist at Scotiabank, said it was “touch and go” whether the UK economy dipped into deflation. He said the timing of the Easter holiday likely to play a big factor in the final reading, rather than an underlying trend of falling prices.

Economists have noted that March’s figure showed technical deflation of -0.01% to two decimal places.

Mark Carney, the Governor of the Bank of England, stressed last week that any period of negative inflation was likely to be temporary. Carney said inflation was expected to pick up “notably” towards the end of this year when the impact of the rapid decline in oil prices fades.

Unveiling the Bank’s latest inflation Report, the Governor said he expected price growth to climb “above 1pc” by the end of this year. “In the absence of further falls in commodity prices... inflation rates close to zero are unlikely to endure for very long,” he said.

Period of Falling Prices

Economists at Investec said April’s figure would be pushed down by a 2% decline in water charges, lower excise duties and downward pressure from airfares, as Easter fell earlier in the year than in 2014. This is expected to more than offset a 1.3% rise in petrol prices between March and April.

However, Victoria Clarke and Philip Shaw, economists at Investec, said any negative inflation would not signal the start of a sustained period of falling prices.

“We are at pains to stress that this is not deflation, per se. Deflation properly defined is a persistent fall in the general level of prices, not a temporary decline below zero, triggered by sharp declines in energy and food costs. “Indeed, we suspect that May’s figures will re-enter positive territory.”

Others believe inflation could climb back towards the Bank of England’s 2pc target by the beginning of 2016. “With the UK’s low unemployment rate likely to support a further pick-up in pay growth and few signs that deflation is spreading from goods to services, the chances are that CPI inflation will return to about 1.5pc early next year,” said Samuel Tombs, an economist at Capital Economics.

Impact of Deflation

There has been much debate about the impact of deflation on the UK economy. If short-term it can provide a powerful stimulus to consumer and business investment spending levels, with all the positive economic wider impact that has.

However, if deflation, like in Japan, continues it could delay spending as people could be more inclined to buy say that new car next year in the knowledge that prices will fall even further.

This then has a hugely impact on the wider economy with companies seeing a fall in demand for goods and services; impacting on profitability and the ability not just to recruit new staff but maintain existing staffing levels.